It's the biggest untold economic story of our time: more
of the nation's bounty held in fewer and fewer hands.
And Bush's tax cuts are only making the problem worse

By Paul Krugman

12/22/06 "Rollingstone" -- - Why doesn't Bush get credit
for the strong economy?" That question has been asked
over and over again in recent months by political
pundits. After all, they point out, the gross domestic
product is up; unemployment, at least according to
official figures, is low by historical standards; and
stocks have recovered much of the ground they lost in
the early years of the decade, with the Dow surpassing
12,000 for the first time. Yet the public remains deeply
unhappy with the state of the economy. In a recent poll,
only a minority of Americans rated the economy as
"excellent" or "good," while most consider it no better
than "fair" or "poor."

Are people just ungrateful? Is the administration
failing to get its message out? Are the news media, as
conservatives darkly suggest, deliberately failing to
report the good news?

None of the above. The reason most Americans think the
economy is fair to poor is simple: For most Americans,
it really is fair to poor. Wages have failed to keep up
with rising prices. Even in 2005, a year in which the
economy grew quite fast, the income of most non-elderly
families lagged behind inflation. The number of
Americans in poverty has risen even in the face of an
official economic recovery, as has the number of
Americans without health insurance. Most Americans are
little, if any, better off than they were last year and
definitely worse off than they were in 2000.

But how is this possible? The economic pie is getting
bigger -- how can it be true that most Americans are
getting smaller slices? The answer, of course, is that a
few people are getting much, much bigger slices.
Although wages have stagnated since Bush took office,
corporate profits have doubled. The gap between the
nation's CEOs and average workers is now ten times
greater than it was a generation ago. And while Bush's
tax cuts shaved only a few hundred dollars off the tax
bills of most Americans, they saved the richest one
percent more than $44,000 on average. In fact, once all
of Bush's tax cuts take effect, it is estimated that
those with incomes of more than $200,000 a year -- the
richest five percent of the population -- will pocket
almost half of the money. Those who make less than
$75,000 a year -- eighty percent of America -- will
receive barely a quarter of the cuts. In the Bush era,
economic inequality is on the rise.

Rising inequality isn't new. The gap between rich and
poor started growing before Ronald Reagan took office,
and it continued to widen through the Clinton years. But
what is happening under Bush is something entirely
unprecedented: For the first time in our history, so
much growth is being siphoned off to a small, wealthy
minority that most Americans are failing to gain ground
even during a time of economic growth -- and they know
it.

A merica has never been an egalitarian society, but
during the New Deal and the Second World War, government
policies and organized labor combined to create a broad
and solid middle class. The economic historians Claudia
Goldin and Robert Margo call what happened between 1933
and 1945 the Great Compression: The rich got
dramatically poorer while workers got considerably
richer. Americans found themselves sharing broadly
similar lifestyles in a way not seen since before the
Civil War.

But in the 1970s, inequality began increasing again --
slowly at first, then more and more rapidly. You can see
how much things have changed by comparing the state of
affairs at America's largest employer, then and now. In
1969, General Motors was the country's largest
corporation aside from AT&T, which enjoyed a
government-guaranteed monopoly on phone service. GM paid
its chief executive, James M. Roche, a salary of
$795,000 -- the equivalent of $4.2 million today,
adjusting for inflation. At the time, that was
considered very high. But nobody denied that ordinary GM
workers were paid pretty well. The average paycheck for
production workers in the auto industry was almost
$8,000 -- more than $45,000 today. GM workers, who also
received excellent health and retirement benefits, were
considered solidly in the middle class.

Today, Wal-Mart is America's largest corporation, with
1.3 million employees. H. Lee Scott, its chairman, is
paid almost $23 million -- more than five times Roche's
inflation-adjusted salary. Yet Scott's compensation
excites relatively little comment, since it's not
exceptional for the CEO of a large corporation these
days. The wages paid to Wal-Mart's workers, on the other
hand, do attract attention, because they are low even by
current standards. On average, Wal-Mart's
non-supervisory employees are paid $18,000 a year, far
less than half what GM workers were paid thirty-five
years ago, adjusted for inflation. And Wal-Mart is
notorious both for how few of its workers receive health
benefits and for the stinginess of those scarce
benefits.

The broader picture is equally dismal. According to the
federal Bureau of Labor Statistics, the hourly wage of
the average American non-supervisory worker is actually
lower, adjusted for inflation, than it was in 1970.
Meanwhile, CEO pay has soared -- from less than thirty
times the average wage to almost 300 times the typical
worker's pay.

The widening gulf between workers and executives is part
of a stunning increase in inequality throughout the U.S.
economy during the past thirty years. To get a sense of
just how dramatic that shift has been, imagine a line of
1,000 people who represent the entire population of
America. They are standing in ascending order of income,
with the poorest person on the left and the richest
person on the right. And their height is proportional to
their income -- the richer they are, the taller they
are.

Start with 1973. If you assume that a height of six feet
represents the average income in that year, the person
on the far left side of the line -- representing those
Americans living in extreme poverty -- is only sixteen
inches tall. By the time you get to the guy at the
extreme right, he towers over the line at more than 113
feet.

Now take 2005. The average height has grown from six
feet to eight feet, reflecting the modest growth in
average incomes over the past generation. And the
poorest people on the left side of the line have grown
at about the same rate as those near the middle -- the
gap between the middle class and the poor, in other
words, hasn't changed. But people to the right must have
been taking some kind of extreme steroids: The guy at
the end of the line is now 560 feet tall, almost five
times taller than his 1973 counterpart.

What's useful about this image is that it explodes
several comforting myths we like to tell ourselves about
what is happening to our society.

MYTH #1: INEQUALITY IS MAINLY A PROBLEM OF POVERTY.
According to this view, most Americans are sharing in
the economy's growth, with only a small minority at the
bottom left behind. That places the onus for change on
middle-class Americans who -- so the story goes -- will
have to sacrifice some of their prosperity if they want
to see poverty alleviated.

But as our line illustrates, that's just plain wrong.
It's not only the poor who have fallen behind -- the
normal-size people in the middle of the line haven't
grown much, either. The real divergence in fortunes is
between the great majority of Americans and a very
small, extremely wealthy minority at the far right of
the line.

MYTH #2: INEQUALITY IS MAINLY A PROBLEM OF EDUCATION.
This view -- which I think of as the eighty-twenty
fallacy -- is expressed by none other than Alan
Greenspan, former chairman of the Federal Reserve. Last
year, Greenspan testified that wage gains were going
primarily to skilled professionals with college
educations -- "essentially," he said, "the top twenty
percent." The other eighty percent -- those with less
education -- are stuck in routine jobs being replaced by
computers or lost to imports. Inequality, Greenspan
concluded, is ultimately "an education problem."

It's a good story with a comforting conclusion:
Education is the answer. But it's all wrong. A closer
look at our line of Americans reveals why. The richest
twenty percent are those standing between 800 and 1,000.
But even those standing between 800 and 950 -- Americans
who earn between $80,000 and $120,000 a year -- have
done only slightly better than everyone to their left.
Almost all of the gains over the past thirty years have
gone to the fifty people at the very end of the line.
Being highly educated won't make you into a winner in
today's U.S. economy. At best, it makes you somewhat
less of a loser.

MYTH #3: INEQUALITY DOESN'T REALLY MATTER.
In this view, America is the land of opportunity, where
a poor young man or woman can vault into the upper
class. In fact, while modest moves up and down the
economic ladder are common, true Horatio Alger stories
are very rare. America actually has less social mobility
than other advanced countries: These days, Horatio Alger
has moved to Canada or Finland. It's easier for a poor
child to make it into the upper-middle class in just
about every other advanced country -- including famously
class-conscious Britain -- than it is in the United
States.

Not only can few Americans hope to join the ranks of the
rich, no matter how well educated or hardworking they
may be -- their opportunities to do so are actually
shrinking. As best we can tell, pretax incomes are now
as unequally distributed as they were in the 1920s --
wiping out virtually all of the gains made by the middle
class during the Great Compression.

There's a famous scene in the 1987 movie Wall Street in
which Gordon Gekko, the corporate predator played by
Michael Douglas, tells a meeting of stunned shareholders
that greed is good, that the unbridled pursuit of
individual wealth serves the interests of the company
and the nation. In the movie, Gekko gets his
comeuppance; in real life, the Gordon Gekkos took over
both corporate America and, eventually, our political
system.

Oliver Stone didn't conjure Gekko's "greed" line out of
thin air. It was based on a real speech given by
corporate raider Ivan Boesky -- and it reflected what
many corporate executives, conservative intellectuals
and right-wing politicians were saying at the time.

It's no coincidence that ringing endorsements of greed
began to be heard at the same time that the actual
incomes of America's rich began to soar. In part, the
new pro-greed ideology was a way of rationalizing what
was already happening. But it was also, to an important
extent, a cause of the phenomenon. In the past thirty
years, right-wing foundations have devoted enormous
resources to promoting this agenda, building a
far-reaching network of think tanks, media outlets and
conservative scholars to legitimize higher levels of
inequality. "On average, corporate America pays its most
important leaders like bureaucrats," the Harvard
Business Review lamented in 1990, calling for higher pay
for top executives. "Is it any wonder then that so many
CEOs act like bureaucrats?"

Although corporate executives have always had the power
to pay themselves lavishly, their self-enrichment was
limited by what Lucian Bebchuk, Jesse Fried and David
Walker -- the leading experts on exploding executive
paychecks -- call the "outrage constraint." What they
mean is that a conspicuously self-dealing CEO would be
forced to moderate his greed by unions, the press and
politicians: The social climate itself condemned
executive salaries that seem immodest.

Lately, however, we have experienced a death of outrage.
Thanks to the right's well-funded and organized effort,
corporate executives now feel no shame in lining their
pockets with huge bonuses and gigantic stock options.
Such self-dealing is justified, they say: Greed is what
made America great, and greedy executives are exactly
what corporate America needs.

At the same time, there has been a concerted attack on
the institutions that have helped moderate inequality --
in particular, unions. During the Great Compression, the
rate of unionization nearly tripled; by 1945, more than
one in three American workers belonged to a union. A lot
of what made General Motors the relatively egalitarian
institution it was in the 1960s had to do with its
powerful union, which was able to demand high wages for
its members. Those wages, in turn, set a standard that
elevated the income of workers who didn't belong to
unions. But today, in the era of Wal-Mart, fewer than
one in eleven workers in the private sector is organized
-- effectively preventing hundreds of thousands of
working Americans from joining the middle class.

Why isn't Wal-Mart unionized? The answer is simple and
brutal: Business interests went on the offensive against
unions. And we're not talking about gentle persuasion;
we're talking about hardball tactics. During the late
1970s and early 1980s, at least one in every twenty
workers who voted for a union was illegally fired; some
estimates put the number as high as one in eight. And
once Ronald Reagan took office, the anti-union campaign
was aided and abetted by political support at the
highest levels.

Unions weren't the only institution that fostered income
equality during the generation that followed the Great
Compression. The creation of a national minimum wage
also set a benchmark for the entire economy, boosting
the bargaining position of workers. But under Reagan,
Congress failed to raise the minimum wage, allowing its
value to be eroded by inflation. Between 1981 and 1989,
the minimum wage remained the same in dollar terms --
but inflation shrank its purchasing power by twenty-five
percent, reducing it to the lowest level since the
1950s.

After Reagan left office, there was a partial reversal
of his anti-labor policies. The minimum wage was
increased under the elder Bush and again under Clinton,
restoring about half the ground it lost under Reagan.
But then came Bush the Second -- and the balance of
power shifted against workers and the middle class to a
degree not seen since the Gilded Age.

During the 2000 election campaign, George W. Bush joked
that his base consisted of the "haves and the have
mores." But it wasn't much of a joke. Not only has the
Bush administration favored the interests of the
wealthiest few Americans over those of the middle class,
it has consistently shown a preference for people who
get their income from dividends and capital gains,
rather than those who work for a living.

Under Bush, the economy has been growing at a reasonable
pace for the past three years. But most Americans have
failed to benefit from that growth. All indicators of
the economic status of ordinary Americans -- poverty
rates, family incomes, the number of people without
health insurance -- show that most of us were worse off
in 2005 than we were in 2000, and there's little reason
to think that 2006 was much better.

So where did all the economic growth go? It went to a
relative handful of people at the top. The earnings of
the typical full-time worker, adjusted for inflation,
have actually fallen since Bush took office. Pay for
CEOs, meanwhile, has soared -- from 185 times that of
average workers in 2003 to 279 times in 2005. And
after-tax corporate profits have also skyrocketed, more
than doubling since Bush took office. Those profits will
eventually be reflected in dividends and capital gains,
which accrue mainly to the very well-off: More than
three-quarters of all stocks are owned by the richest
ten percent of the population.

Bush wasn't directly responsible for the stagnation of
wages and the surge in profits and executive
compensation: The White House doesn't set wage rates or
give CEOs stock options. But the government can tilt the
balance of power between workers and bosses in many ways
-- and at every juncture, this government has favored
the bosses. There are four ways, in particular, that the
Bush administration has helped make the poor poorer and
the rich richer.

First, like Reagan, Bush has stood firmly against any
increase in the minimum wage, even as inflation erodes
the value of a dollar. The minimum wage was last raised
in 1997; since then, inflation has cut the purchasing
power of a minimum-wage worker's paycheck by twenty
percent.

Second, again like Reagan, Bush has used the
government's power to make it harder for workers to
organize. The National Labor Relations Board, founded to
protect the ability of workers to organize, has become
for all practical purposes an agent of employers trying
to prevent unionization. A spectacular example of this
anti-union bias came just a few months ago. Under U.S.
labor law, legal protections for union organizing do not
extend to supervisors. But the Republican majority on
the NLRB ruled that otherwise ordinary line workers who
occasionally tell others what to do -- such as charge
nurses, who primarily care for patients but also give
instructions to other nurses on the same shift -- will
now be considered supervisors. In a single
administrative stroke, the Bush administration stripped
as many as 8 million workers of their right to unionize.

Third, the administration effectively blocked what might
have been a post-Enron backlash against self-dealing
corporate insiders. Corporate scandals dominated the
news in the first half of 2002 -- but then the subject
was changed to the urgent need to invade Iraq, and the
drive for reform was squelched. With Americans focused
on the war, CEOs are once again rewarding themselves at
impressive -- and unprecedented -- levels.

Finally, there's the government's most direct method of
affecting incomes: taxes. In this arena, Bush has made
sure that the rich pay lower taxes than they have in
decades. According to the latest estimates, once the
Bush tax cuts have taken full effect, more than a third
of the cash will go to people making more than $500,000
a year -- a mere 0.8 percent of the population.

It's easy to get confused about the Bush tax cuts. For
one thing, they are designed to confuse. The core of the
Bush policy involves cutting taxes on high incomes,
especially on the income wealthy Americans receive from
capital gains and dividends. You might say that the Bush
administration favors people who live off their wealth
over people who have a job. But there are some
middle-class "sweeteners" thrown in, so the
administration can point to a few ordinary American
families who have received significant tax cuts.

Furthermore, the administration has engaged in a
systematic campaign of disinformation about whose taxes
have been cut. Indeed, one of Bush's first actions after
taking office was to tell the Treasury Department to
stop producing estimates of how tax cuts are distributed
by income class -- that is, information on who gained
how much. Instead, official reports on taxes under Bush
are textbook examples of how to mislead with statistics,
presenting a welter of confusing numbers that convey the
false impression that the tax cuts favor middle-class
families, not the wealthy.

In reality, only a few middle-class families received a
significant tax cut under Bush. But every wealthy
American -- especially those who live off of stock
earnings or their inheritance -- got a big tax cut. To
picture who gained the most, imagine the son of a very
wealthy man, who expects to inherit $50 million in stock
and live off the dividends. Before the Bush tax cuts,
our lucky heir-to-be would have paid about $27 million
in estate taxes and contributed 39.6 percent of his
dividend income in taxes. Once Bush's cuts go into
effect, he could inherit the whole estate tax-free and
pay a tax rate of only fifteen percent on his stock
earnings. Truly, this is a very good time to be one of
the have mores.

It's worth noting that Bush doesn't simply favor the
upper class: It's the upper-upper class he cares about.
That became clear last fall, when the House and Senate
passed rival tax-cutting bills. (What were they doing
cutting taxes yet again in the face of a huge budget
deficit and an expensive war? Never mind.) The Senate
bill was devoted to providing relief to middle-class
wage earners: According to the Tax Policy Center,
two-thirds of the Senate tax cut would have gone to
people with incomes of between $100,000 and $500,000 a
year. Those making more than $1 million a year would
have received only eight percent of the cut.

The House bill, by contrast, focused on extending tax
cuts on capital gains and dividends. More than forty
percent of the House cuts would have flowed to the $1
million-plus group; only thirty percent to the 100K to
500K taxpayers.

The White House favored the House bill -- and the final,
reconciled measure wound up awarding a quarter of the
benefits to America's millionaires. That, in a nutshell,
is the politics of income inequality under Bush.

Oh, one last thing: What about the claim that the Bush
tax cuts did wonders for economic growth? In fact, job
creation has been much slower under Bush than under
Clinton, and overall growth since 2003 is largely the
result of the huge housing boom, which has more to do
with low interest rates than with taxes. But the biggest
irony of all is that the real boom -- the one in the
1990s -- followed tax changes that were the reverse of
Bush's policies. Clinton raised taxes on the rich, and
the economy prospered.

A generation ago the distribution of income in the
United States didn't look all that different from that
of other advanced countries. We had more poverty,
largely because of the unresolved legacy of slavery. But
the gap between the economic elite and the middle class
was no larger in America than it was in Europe.

Today, we're completely out of line with other advanced
countries. The share of income received by the top 0.1
percent of Americans is twice the share received by the
corresponding group in Britain, and three times the
share in France. These days, to find societies as
unequal as the United States you have to look beyond the
advanced world, to Latin America. And if that comparison
doesn't frighten you, it should.

The social and economic failure of Latin America is one
of history's great tragedies. Our southern neighbors
started out with natural and human resources at least as
favorable for economic development as those in the
United States. Yet over the course of the past two
centuries, they fell steadily behind. Economic
historians such as Kenneth Sokoloff of UCLA think they
know why: Latin America got caught in an inequality
trap. For historical reasons -- the kind of crops they
grew, the elitist policies of colonial Spain -- Latin
American societies started out with much more inequality
than the societies of North America. But this inequality
persisted, Sokoloff writes, because elites were able to
"institutionalize an unequal distribution of political
power" and to "use that greater influence to establish
rules, laws and other government policies that
advantaged members of the elite relative to
non-members." Rather than making land available to small
farmers, as the United States did with the Homestead
Act, Latin American governments tended to give large
blocks of public lands to people with the right
connections. They also shortchanged basic education --
condemning millions to illiteracy. The result, Sokoloff
notes, was "persistence over time of the high degree of
inequality." This sharp inequality, in turn, doomed the
economies of Latin America: Many talented people never
got a chance to rise to their full potential, simply
because they were born into the wrong class.

In addition, the statistical evidence shows, unequal
societies tend to be corrupt societies. When there are
huge disparities in wealth, the rich have both the
motive and the means to corrupt the system on their
behalf. In The New Industrial State, published in 1967,
John Kenneth Galbraith dismissed any concern that
corporate executives might exploit their position for
personal gain, insisting that group decision-making
would enforce "a high standard of personal honesty." But
in recent years, the sheer amount of money paid to
executives who are perceived as successful has
overridden the restraints that Galbraith believed would
control executive greed. Today, a top executive who
pumps up his company's stock price by faking high
profits can walk away with vast wealth even if the
company later collapses, and the small chance he faces
of going to jail isn't an effective deterrent. What's
more, the group decision-making that Galbraith thought
would prevent personal corruption doesn't work if
everyone in the group can be bought off with a piece of
the spoils -- which is more or less what happened at
Enron. It is also what happens in Congress, when
corporations share the spoils with our elected
representatives in the form of generous campaign
contributions and lucrative lobbying jobs.

As the past six years demonstrate, such political
corruption only worsens as economic inequality rises.
Indeed, the gap between rich and poor doesn't just mean
that few Americans share in the benefits of economic
growth -- it also undermines the sense of shared
experience that binds us together as a nation. "Trust is
based upon the belief that we are all in this together,
part of a 'moral community,' " writes Eric Uslaner, a
political scientist at the University of Maryland who
has studied the effects of inequality on trust. "It is
tough to convince people in a highly stratified society
that the rich and the poor share common values, much
less a common fate."

In the end, the effects of our growing economic
inequality go far beyond dollars and cents. This,
ultimately, is the most pressing question we face as a
society today: Will the United States go down the path
that Latin America followed -- one that leads to
ever-growing disparity in political power as well as in
income? The United States doesn't have Third World
levels of economic inequality -- yet. But it is not hard
to foresee, in the current state of our political and
economic scene, the outline of a transformation into a
permanently unequal society -- one that locks in and
perpetuates the drastic economic polarization that is
already dangerously far advanced.

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